Definition of Malaysia’s Government Debt 2018
by Dave Ananth
Dave Ananth is a senior lawyer, a former Magistrate and advocate
in Malaysia before taking up a position with the Inland Revenue Department in
New Zealand as a Prosecutor. He now practises as a Tax Barrister, based in
Auckland. He is an expert in taxation and tax policy. He also writes extensively on direct and indirect
tax issues in Malaysia and New Zealand.
He is a consultant for Wolters Kluwer Malaysia. He can be reached at
davetaxnz@gmail.com.
Richard
Greene, once joked, in an article about US public accounting, that the “basic
drives of man are few: to get enough food, to find shelter, and to keep debt
off the balance sheet”[1].
What
constitutes government (public sector) debt has always been a contentious
issue. Government debt affects many factors – the amount of public and private
investment, GDP, credit rating and fiscal flexibility, just to name a few. Given
its political salience, it is in the best interests of a government to ensure
that its debt levels are capped at internationally acceptable levels.
Malaysia
has succeeded in piquing its people’s interest in the government debt debate. The
definition of “government debt” has been subject to much discussion recently
when the current and previous Ministers of Finance publicly disagreed on the
actual levels of government debt in Malaysia.
According
to Bank Negara Malaysia’s data, the federal government debt at the end of 2017
was RM686.8 billion. This was 50.8% of GDP which is well within the rule that
federal debt should not exceed 55% of GDP. However, the new Minister of Finance
has announced that the debt exceeds RM1.087 trillion (80.3% of GDP) once
government guarantees and public-private partnership (PPP) lease payments were
included[2].
Which Minister of Finance speaks the truth? What does government debt consist of?
What IS government debt?
Despite
government debt featuring heavily in the political and economic landscape,
there is no consensus on how it should be measured.
Timothy
C. Irwin provides that to measure government debt, one must answer the
following:
- Definition of “government”
- Definition of “debt and deficit”[3].
Definition of “government”
Should
the definition of “government” include only the legal entity of the government
or should it be widened to include Private Public Partnerships (PPP)?
If a
narrow definition is adopted where only the borrowings of the government as a
legal entity is counted as debt, then the amount of RM686.8b is not incorrect.
However, detractors would point out that this would encourage the government to
manage its debt levels by entering into privatisation or PPP. By doing so, debt
rules can be circumvented by having these participating private entities
borrow. It is a common method employed by governments globally, including
Malaysia, to present acceptable government debt levels. Debts of these private
entities are excluded from the calculation of direct government debt simply
because they do not fall within the definition of “government”.
Should
a wider definition be adopted then? Timothy C. Irwin pointed out that it might
not prove to be very helpful, using the example the below[4]:
“When the government nationalized several banks during the financial crisis of 2008, its balance sheet grew enormously. In June 2009, the debt of the public sector including the banks (but excluding the Bank of England) was 198 percent of GDP, while the debt of general government was 58 percent. To have reported only the finances of the entire public sector would have frustrated attempts to monitor the government's core operations…”
Definition of “debt and deficit”
For
purposes of this article, we will only look at the definition of “debt”.
A
narrow definition would allow the provision of targeted measurements and
information on certain aspects of public finances. However, it would fail to provide
an overall view of the government’s savings and of the sustainability of its
policies. It would also encourage window dressing, using off-balance-sheet
transactions.
A broad
definition would be able to provide a more accurate and comprehensive view of
the government’s savings and the sustainability of its policies, as most
off-balance-sheet transactions would fall within its purview. However, it could
be difficult to obtain reliable measurements and may be susceptible to creative
accounting where purposeful mismeasurements are performed.
Malaysia
The
standard procedure of credit rating agencies is to usually take into
consideration the direct liabilities of the government in the calculation of
the debt-to-GDP ratio. As such, is the inclusion
of contingent liabilities and future debt obligations, ie government guarantees
and leases, necessary for purposes of calculating Malaysia’s debt?
Contingent
liabilities are generally described as potential liabilities that may or may
not occur, depending on the outcome of an uncertain future event.
In this
context, contingent liabilities refer to government-guaranteed debt, which is
usually reported separately from the federal government debt. Examples of
contingent liabilities are the loans under the National Higher Education Fund
Corp (PTPTN) and 1Malaysia Development Bhd (1MDB).
If the entities can pay off the debts which are guaranteed by the
government, the guarantee by itself does not fall on the government since there
is no debt to pay on behalf. For example, entities such as Khazanah Nasional
Bhd, Tenaga Nasional Bhd and MIDF are able to pay off their
debt. If these entities are unable to service their debt, government is legally
bound to pay on their behalf and therefore, such debt will crystalise into a
government debt. Hence, debt that is only going to be owing and accruing in the
future should not be included in the current government debt.
Apart
from government-guaranteed debt, there is a matter of PPP lease payments. These
payments do not fall under direct liabilities or contingent liabilities, which
led to such debts being dubbed as “off-off-balance sheet” government debt.
PPP,
essentially, is a long-term contract between the public sector and a private
company covering the design, construction, maintenance, and financing of an
asset (eg, infrastructure). It is usually associated with a government-backed
guarantee. Such arrangement removes the
bulk of infrastructure spending from the government’s budget. However, in
return the government will have future commitments to make lease payments in
respect of such projects.
Take
Pembinaan PFI Sdn Bhd, for example. It is a company owned by the Ministry of
Finance that was established in 2006 to source financing for government
construction projects to be carried out. Its 2014 financial statement shows a total
debt of RM28.75 billion. However, such amount is not recorded in the government-guaranteed
debt list between 2015 and 2016[5].
RM1 trillion debt: Cause for alarm?
It is
worth noting that debt payments are usually due on an annual basis and
therefore, the government is not expected to make a one-off payment of RM1
trillion. Should the current government take necessary measures to boost
Malaysia’s economic growth, there is no cause for concern over its debt
sustainability.
However,
the previous government’s move of emphasising only the federal government debt
RM686.8 billion or not reporting the PPP lease payments may be construed as
misleading practices.
Debt,
in common parlance, is a sum of money due from one person to another (The Law-Dictionary).
The word debt is of large import, including not only debts of record or
judgment, and debts by specialty, but also obligations arising under simple
contract, to a very wide extent, and in its popular sense includes all that is
due to a man under any form of obligation of promise (Burril). In my view, I
think the best definition is to be practical and to “call a spade a spade”
rather than using creative accounting to hide behind irresponsible practices.
The words “if he is now indebted to the company” would mean there is an
obligation for him to pay the company back, as the debt is now due and
presently owing.
In this
case, although the government guarantees and PPP lease payments do not need to
be included in the calculation of federal debt, it must be still be reported as
potential liabilities in the future and must be will be treated as debts as and
when they fall due. For example, if the Government is paying crystallised debt of
private companies that cannot service their debt and use the taxpayers’ money
is used to pay debt, it becomes a government debt and must be reflected accordingly
in the financial statements.
I think
Minister of Finance is saying, let’s tell the truth, and shame the devil, and
he must be commended for admitting the existence of the issue at hand.
[1] Greene. (1980, November 24). The Joys of Leasing. Forbes,
59.
[2] Guan Eng details how RM1tril govt debt figure was
calculated. (2018, May 24). Retrieved
from The Star Online:
https://www.thestar.com.my/business/business-news/2018/05/24/debt-to-gdp-ratio-above-80pct-says-lim/
[3] Irwin, T. C. (2015). Defining the Government's Debt
and Deficit. IMF Working Paper
[4] Irwin, T. C. (2015). Defining the Government's Debt
and Deficit. IMF Working Paper
[5] Yeap, C.
(2018, January 18). Cover Story: The debt spiral– what’s on the books,
contingent liabilities and off-balance sheet items. Retrieved from The Edge
Markets: http://www.theedgemarkets.com/article/cover-story-debt-spiral%E2%80%93-whats-books-contingent-liabilities-and-offbalance-sheet-items
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